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ArsDigita Founder Responds to Closing
An anonymous reader sent in: "Net celebrity and ArsDigita founder Eve Andersson has written a brief history of the firm, documenting its downfall from her point of view. Fascinating reading, and yet another example of how a good thing can go so wrong."
quote
"In late March 2001, ArsDigita received $38 million in financing... In early April, Allen Shaheen... took Philip's place as CEO.
'ArsDigita University was one of the primary reasons I decided to join ArsDigita Corporation.'
- Allen Shaheen, early April 2000"
end quote
What the heck is that? Shaheen commenting on the company a year before he joined? All the quotes in the "Venture capital and new management" section are screwy like that. Is Eve trying to pull a fast one, or is it a mistake?
Someone else gets hurt.
Eve really did write a beautiful article, and I thank her for writting it. She did, however, try to wipe her hands clean of all responsibilty. Not to say she is responsible, but ArsDigita's death was not due to just the capitalists that sealed its fate, but the capitalists within.
ArsDigita was one of the few net companies actually developing a useful product that people wanted. It should have weathered the dot-com bombs, but it fell into a cycle of greed. Rather than making modest earnings, they wanted to get richer faster. It was easy to ignore the fact they were making tons of money, and doing a good job. They had the potential to make more, and being good young american capitalists they went for the opportunity.
A web developer no matter how talented is not actually worth 7 million dollars. This is not to say they aren't "the best" or any other such nonsense, but rather 7 million dollars is a HUGE amount of money.
Think of ID games. They keep their number smalls, their business controlled and make solid, strong, modest, earnings for the most desired product of its kind. They are extremly successful and will continue to be because they hold similar ideals to ArsDigita.
ArsDigita, however, let it be controlled by big fish who offered to front more money. More money, more profit, everyone's happy? No, because everyone was trying to get rich quickly. Sure you were trying to make a good product, but you were so bedazzeled by the money that ArsDigita's creative control was lost. If you invite sharks into your pool, expect to get bit.
Eve I'm sorry you got screwed. You did your job well, but no matter getting rich quick means someone else is paying for it. Your company tried to raise too much capital, too fast. You got your ass kicked by the best, but we're all alittle wiser for it.
Oh well, I invite you to join my world. A soon to be college graduate looking at a very tight job market because a few dot-commers wanted little red sports cars.
Welcome,
Rob
Yes. Capitalism teaches that growth=good, and this is rarely questioned.
Most decent business schools teach the parameters of sustainable growth. A _good_ MBA or CPA (who stayed awake in class and doesn't have a personal agenda or divided loyalties) can make these clear. Any startup or small company needs to trim its sails - review its business plan - at least quarterly if not monthly, and reviewing the sustainability of its growth curve must be one of the principal objectives, because this simply boils down to its continuing viability as a going concern.
A small company seeking capital has to find "angel" investors - people who will inject money, have the patience to watch the company grow, and eventually take out a somewhat higher profit than they could get in the big bond and equity markets. You will often have to give such "angel" investors some equity in the company, but your negotiation objective should be to give them as little equity as they will accept, and meanwhile you must retain control. The "angel" investors know this game, but if they like you and your company business plan, they will agree to let you keep control. After all, they're investors - if they wanted to run a company, they'd do that with their money instead.
But if you get VCs (Vulture Capitalists) involved before you're on the brink of explosive growth, well... get ready to lose your company. The VCs won't invest small sums - that would lead them into too many investments - and they like to closely control their favored few. The VCs will seek out piggish equity stakes and executive control. They want an Initial Public Offering (IPO) and a quick turnover of their big stock holdings for astronomical profits. They need your company to grow 200-300% with no limit in sight in order to unload their stock on the mass of investors. They're always looking for the next Apple, although they'll kill ten small companies for every one that hits the bigtime. That's the moral here, folks. Beware of the VCs. They'll kill you.
Wow. I've been on the product team at ArsDigita for almost three years now. From my perspective, there are a gazillion egregious inaccuracies in the article. Anyway, I just wanted to say that Eve/Philip/etc. represent only one side of the story, and that there are many other sides to the story as well.
I have tremendous respect for a lot of people at ArsDigita. Her story is absolutely insulting to the people who have worked so hard to ship something, and it has certainly caused any remaining goodwill I have towards her (because I do think she IS a nice person) evaporate. Her indictment of Richard Buck and Michael Yoon is completely unfounded and complete bullshit. One stunning example is that Richard Buck is a poor manager because he was not able to "motivate the product team to work more than 40 hours/week." I find this to be disgusting and utter nonsense. One, just because you don't drive your employees like slaves doesn't mean you suck. Two, Eve was never at the office, so how could she know how long we worked? She was too busy working on her VoiceXML book that she told no one about!
Yes.
This rant, though I'm sure it's full of truth, does manage to excuse the founders of responsibility.
It sounds like their company was doing well enough to fund its own growth, albeit at a slower pace.
They could get richer faster, just not as richer as faster as they'd like.
Of course, they might now still be around as the economy recovers. Might still be in a position to make big scores that are available in the wake of all the companies that joined them in the merry rush to VC money and are not longer around to compete.
But no.
Actually there are lots of professional services companies with the same approach. A lot of legal, accounting and engineering practices have a 'no growth' or 'slow growth' policy.
The reason is that professional services companies do not become more profitable as they become larger. A PSO company sells the professional skills of its employees. In a typical PSO company there is a pyramid of expertise. For each senior partner there might be two junior partners, four associates and the same number of support staff. That ratio does not change much if there are a hundred senior partners or one.
The problem for the PSO company is that a senior partner has to be paid pretty well or else they will go off and start their own outfit. At the bottom of the tree an associate might be paid $400 a day and be charged out at $1,600 - a markup of 400%. But at the top of the tree a senior partner is likely to be paid more than their charge out rate, their real job being to bring work into the practice. A senior partner might charge out 100 days a year (i.e ahlf the normal rate) at $5,000 a day, but they can keep busy 4 associates at a profit of $6,400 a day and 2 juniors at a profit of $3,600 a day, so they actually contribute to the practice an average of $12,500 a day and take out maybe $6,000.
The reason PSO firms have to grow is that as the people at the base of the pyramid get more experience the only way of maintaining profitability is to either increase recruitment at the base or to restrict the number of promotions. That is why a lot of accounting companies have 'up or out' policies. If you don't make the next step in the ladder by a certain date you are told to look for work elsewhere.
All in all VC should never be funding pure PSO companies. Most PSO companies are organized as partnerships for good reason - the company itself actually has very little value, the value is all in the knowledge of the employees. And those employees can and will walk out the door with it unless they feel they are rewarded for it.
PSO can add a lot to a growth company's bottom line, but only as a supplement to product, not as a replacement. In general the markets tend to be sniffy about companies that make more than 20-25% of their revenues from PSO. An Oracle or an IBM can make a lot of money from PSO, even run a pure PSO division. But that works because the customers (and consultants) know that they are buying more than just the consultant's time.
The other problem with PSO is that it is economically a pretty risky proposition. A typical PSO company operates on a margin or 20%. If there is a downturn they don't have much scope to cut costs without layoffs.
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